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“Reform or die!”

On January 24 1984 Deng Xiaoping’s train arrived in Guangzhou to start his first southern tour. China’s paramount leader had travelled to Guangdong province to check whether his policies of ‘reform and opening’ were working. They were. Deng was astonished at the speed of construction in Shenzhen, telling Hong Kong tycoon Henry Fok: “ I am the man who proposed the special economic zones. Looks like I made a good choice.”

But in fact, it was the Sichuanese politician’s second southern tour eight years later that became the best known, and ultimately the most significant.

By then Deng was 87 and held just one official title: he was Honorary Chairman of the China Bridge Association. But according to Ezra Vogel’s new biography, Deng had grown frustrated at the slowing pace of reform. After trying and failing to get the People’s Daily to publish an article supporting the pro-reform stance, Deng decided on a new tactic. He would journey back to the south himself and give his personal blessing to the burgeoning private sector.

Deng’s personal train departed Beijing on January 17, 1992 and as Vogel points out “as far as other leaders knew” he and his retinue were merely going on a “family vacation”.

But it soon became apparent this was not the ordinary holiday of an aging patriarch. On his way south Deng publicly warned Party officials in Wuhan that “whoever is against reform should leave office”. Those in Changsha were then instructed to be “bolder in carrying out reform and opening”.

“Speed up economic development,” Deng insisted.

Once he got to Shenzhen – the laboratory for China’s opening up and for experimenting with ‘unruly’ market forces – Deng was soon touring factories and office buildings. Local crowds cheered him in person, greeting him as ‘Uncle Deng’. The conservatives in Beijing did their best to stop the Chinese media broadcasting news of his southerly progress. But significantly, the Hong Kong press heard of his arrival and started to report the visit to the wider world.

Then Deng showed his old cunning by upping the profile of his visit. Crucially, he convened a meeting in Zhuhai, ostensibly to discuss military planning. The gathering was attended by Qiao Shi, one of the six members of the Standing Committee of the Politburo, as well as a number of top generals and Chinese President Yang Shangkun (unlike today the holder of the presidency wasn’t then the nation’s leader. Still, Yang was a key figure and a Politburo member, making his presence telling).

Vogel points out the event’s significance: “The Zhuhai meeting is not mentioned in books on the southern tour published in mainland China, nor is it noted in the official chronology of Deng’s life, Deng Xiaoping Nianpu. This omission is understandable, for Communist Party leaders do not want inner Party tensions to be revealed in public. But news of the meeting leaked and was, in effect, confirmed by the reactions of Jiang Zemin in the weeks following. The strong representation of military leaders made it clear that, if necessary, the high-level military brass was willing to support a new leader.”

Jiang Zemin’s position as Deng’s successor was not yet fully secure, and the Zhuhai meeting made clear he could still be replaced by Qiao Shi.

Explains Vogel: “Jiang realised that Deng was determined to remove him if he did not boldly promote reform and opening. Jiang could see from Deng’s visit to the south that he had attracted a great deal of support from key leaders in Beijing and from local leaders. Later Jiang acknowledged that he had concluded that Deng’s views would prevail and that he, Jiang, would be wise to support them.”

Hence Deng’s second southern tour would have a profound impact. With his prompting Jiang would switch his support from the ‘conservatives’ – whose preference was for command economy style planning – and instead unleash a fresh wave of economic reform around the country.

Deng spent just over a month touring the south, and in recent days the 20th anniversary of the trip has been commemorated by Chinese media. Their articles reveal that two decades on, the debate on the future direction of the Chinese economy continues.

The influential Caijing magazine, for example, notes that Deng’s tour “provided new impetus for the reform and opening-up” that led a “golden period for development”.

But it worries that the country is stagnating today: “Standing at a new historical starting point, we need to revisit the courageous choices made at that time, face current pressing challenges head-on and strive to deepen the process of reform.”

Deng’s southern tour “injected great vitality into China’s stalled reforms” concurs the Oriental Morning Post. “But 20 years later, China’s reforms have reached a sticking point once again. Chinese intellectuals are constantly crying for a re-acceleration of reforms. But where is the Deng Xiaoping of this era?”

One such intellectual, Hu Yuyue, a professor at Beijing Technology and Business University, says China is at a “crossroads again” and that “multiple obstacles” stand in its way. Deng’s stance still rings true today. Hu insists: “Reform or die!”

In an op-ed in the Financial Times – headlined ‘The long march to a truly capitalist China’ – another commentator, Qin Xiao, penned a similar call for economic reform. “An economic system now dominated by the government needs to become one led by the market and regulated by the government,” Qin wrote. His views are telling because he once ran China Merchants Group, the company that Deng charged with much of the market experimentation in the special economic zones.

Regular readers of WiC will be familiar with some of the bubbling tensions described above. As recently as last week’s issue we touched again on the theme of guojinmintui (‘the state advances as the private sector recedes’). This trend has seen the larger state-owned enterprises (SOEs) crowd out smaller private sector firms in many areas of the economy, thanks to preferential policies and privileged access to cheap bank loans.

The criticism has been that this is throttling private enterprise, which is still the largest creator of jobs and a disproportionate contributor to economic growth.

But the supporters of the large SOEs see them much more positively, as national champions. Leading the case for the defence is the former boss of state holding company Sasac, Li Rongrong, who gave an interview to 21CN Business Herald recently in which he dismissed the term guojinmintui, calling on “a few scholars” to stop “scapegoating” succcessful state-owned firms (see WiC135).

Scapegoats or not, the SOEs have taken on a powerful position in the Chinese economy. In a special report on state capitalism last week, The Economist magazine focused prominently on China and the guojinmintui trend. It noted that state-controlled firms comprise 80% of the value of Chinese stockmarkets; and that in 2009 some 85% of China’s $1.4 trillion in bank loans went to state companies. Between 2002 and 2010 the country’s top 121 SOEs saw their total assets increase from $360 billion to $2.9 trillion. The Economist’s conclusion? China is now “the leading practitioner” of state capitalism globally.

Is that going to change? It looks unlikely in the short term. There are policymakers who want to see the private sector given more encouragement to fight back (see WiC108 for an example of how market reformers have clashed with bosses at the State Grid). But others liken the big SOEs to unstoppable forces of nature – they seem to be getting ever larger and are even acquiring increasing numbers of private firms (both at home and overseas). Given they are the playthings of the conservative planners, it seems evident that the balance of power has swung again – most likely in a way that Deng would not have approved.

All that explains why those in favour of more market reforms – and wary of state capitalism – have used their media allies to make such a fuss about the anniversary of his great southern tour.

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